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BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...

BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.

Machine A Machine B
Original cost $75,900 $181,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $19,900 $39,800
Estimated annual cash outflows $5,020 $10,050



Click here to view the factor table.

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Machine A Machine B
Net present value enter a dollar amount rounded to 0 decimal places enter a dollar amount rounded to 0 decimal places
Profitability index enter the profitability index rounded to 2 decimal places enter the profitability index rounded to 2 decimal places


Which machine should be purchased?

select a machine

Machine AMachine B

should be purchased.

Homework Answers

Answer #1
Net Present value
Machine A Machine B
Annual cash inflows 19900 39800
Less: Annual cash outflows 5020 10050
Net annual cash flows 14880 29750
Multiply: Annuity PVF at 9% for 8yrs 5.53482 5.53482
Present value of inflows 82358.12 164660.9
Less: Investment 75,900 181000
Net present value 6,458 -16339.1
Profitability Index
Machine A Machine B
Present value of inflows 82358 164661
Divide: Investment 75900 181000
Profitability Index 1.09 0.91
Machine A should be purchased
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